What is a Creditors' Voluntary Liquidation (CVL)?June 9, 2020
It’s the end of the road for Malcom’s Auto repair shop.
The combination of unpaid company debts, constant pressure from creditors, and the relentless spread of Covid-19 has spelt the end of what once was a thriving business.
As company director, Malcolm is the one who has made the difficult decision to voluntarily liquidate the company.
After multiple consultations with a licensed insolvency practitioner (IP), Malcolm has come to the conclusion that voluntary liquidation is the only way the business could pay back its debts to creditors.
A Creditors Voluntary Liquidation (CVL) is the most common form of insolvency in the UK. With a CVL, directors can choose who they wish to be the liquidator. It is, the clue in the name, a voluntary process rather than forced on companies through a winding-up petition by their creditors and the court.
It’s extremely important for company directors to seek advice from a licensed insolvency practitioner as early as possible. They will confirm whether a CVL is the right course of action or they will suggest alternatives like a Company Voluntary Arrangement (CVA), Administration or Pre-Pack Administration.
In this article, we’ll uncover exactly what a CVL is, as well as taking a look at how the process unfolds. We’ll also break down its advantages and disadvantages.
What is Creditors Voluntary Liquidation (CVL)?
A CVL is a formal insolvency procedure whereby the company director(s)/shareholders decide to voluntarily liquidate their insolvent company.
If your company’s cash flow has dried up and you’re having trouble paying back mounting debt to creditors, a CVL is a way to close the business and pay back creditors as much as possible.
As its name suggests, a CVL is a voluntary option instigated by the directors and shareholders of the struggling company. This is not to be confused with compulsory liquidation, which involves the company’s creditors forcing liquidation on the business. Unlike compulsory liquidation, a CVL doesn't not involve the courts unless certain stated requirements have not been adhered to.
Similarly, a CVL is not to be confused with Members’ Voluntary Liquidation either - MVLs are only available for solvent companies.
Although it is the company directors’ decision to opt for a CVL, the decision must be approved by at least 75% of shareholders before plans to liquidate the company can go ahead.
How do I know when my company is classed as insolvent?
When it comes to determining whether your company is insolvent or not, there are two main tests your company can run - either the cash flow test or the balance sheet test.
Cash flow insolvency occurs when a company can’t afford its payment obligations as and when they fall due.
The test investigates the amount of working capital (accessible money) related to your debts. If your debts outweigh your working capital, your business is insolvent.
Alternatively, balance sheet insolvency works by comparing your current assets to your current liabilities.
If your liabilities outweigh your assets, your company is classified as insolvent.
The Role of a Licensed Insolvency Practitioner
If you’re going down the route of a CVL, it’s really important to appoint a licensed insolvency practitioner as soon as possible. They will advise you of the best steps to take along the way.
A licensed IP is the only person that can liquidate an insolvent company.
In comparison to the role of a creditor in compulsory liquidation, IP’s are a lot more understanding and have your company’s best interests at heart.
What are my responsibilities as a Company Director?
As a director, you must take steps to mitigate the situation if you believe your company is insolvent. You should avoid taking out any further credit and seek an IP’s help at the earliest possible stage.
Choosing to pay one creditor more or less than another may be classified as a preferential payment and you could become personally liable for repayment.
If you continue to trade after becoming aware of your company’s insolvency, you run the risk of holding yourself accountable for wrongful trading.
Letting your IP know of your insolvency at the earliest stage possible reduces the risk of any misdemeanors and additional stress. They’ll talk you through the options available and ensure you remain compliant in your duties as director of an insolvent company.
How does the process work?
The CVL process is lengthy, so we’ve broken it down into six stages.
Stage 1 - Board of Directors’ Meeting
After the Company Director has consulted with a licensed IP and they have agreed that a CVL is the best option moving forward, the Board of Directors of the insolvent company hold a meeting.
It is here where a date is set for both the shareholders meeting and the Creditors Decision Procedure.
At the meeting, directors will formally announce the appointment of the liquidator (IP) and draft the relevant documentation to commence the process.
In the event of logistical difficulties such as the Coronavirus pandemic, this meeting can be conducted by virtual means like Zoom or Skype.
Stage 2 - Time between the Directors Meeting and Shareholders Meeting/Creditors Decision Procedure
During the average two week limbo phase, the company is not yet legally in liquidation and directors are still considered to be in charge of the company.
It is during this time that the Director must assist the IP in obtaining as much financial information about the company as possible to help in the preparation of the report and Statement of Affairs which will be shared at the creditors meeting.
Any fixed assets that the company owns must be valued and reported by professional agents. It is during this period that employees will be able to submit Redundancy Payment forms in relation to arrears of wages, holiday pay, pay in lieu of notice, and so on.
Stage 3 - Shareholders Meeting
Prior to the meeting, all the company’s directors will sign a Statement of Affairs which outlines the various assets and liabilities belonging to the company.
The Company Director who presents the Statement of Affairs will be the nominated Chairperson of the Shareholders meeting.
Approving the company’s CVL requires 75% of shareholders to vote in favour.
If, for whatever reason it is not accepted, the proposal will need to be revised and resubmitted for approval or the company could face compulsory liquidation.
Stage 4 - Creditors' Decision Procedure
A detailed financial report summarising the company’s financial position will be presented to the creditors. The report will contain extracts of the company’s accounts for the last three financial years, the company’s trading history, and the Statement of Affairs.
The creditors are given a deadline to vote on who they wish to be the liquidator and whether or not to establish a liquidation committee. If they don't respond, the liquidator is simply nominated by the shareholders.
If 50% of creditors vote in favour of the company's proposed liquidator, the liquidation process is ready to commence.
If the vote gathers less than a 50% majority, an alternative liquidator might be proposed by creditors.
Stage 5 - Liquidation
After their subsequent appointment, the liquidator takes charge of the following steps which include notifying Companies House within 15 days and advertising the resolution in The Gazette within 14 days.
From this point onwards, the liquidators role can vary depending on the complexity of the case. The liquidator’s remit can involve:
- Dealing with the formal disposal of company assets.
- Dealing with an investigation into the company’s books and records by submitting a report to the Insolvency Services within 3 months of appointment.
- Processing claims of former employees at the Redundancy Payments Office.
The liquidation process can take anywhere between six months to several years depending on the nature of the case. The liquidator is obliged to send progress reports to creditors and shareholders on an annual basis. These reports are also filed at Companies House.
Stage 6 - The End of the Liquidation
Once the creditors have been repaid and all the assets have been realised, the liquidator will organise a meeting of both members and creditors with a proposal to release themselves as liquidator of the company.
After the liquidator has obtained release from the insolvent company, the company in question is dissolved within three months at Companies House.
What are the advantages?
- Certainty - Directors get to choose the liquidator and are able to discuss with the liquidator how certain matters will dealt with (including repayment timescales and possibility of repurchasing assets) before they decide to go ahead.
- Accountability - Reduces the risk of wrongful trading.
- Stress Relief - Freedom from creditor pressure.
- Morality - Employees made redundant will still receive redundancy payments due to them.
- Unwanted Publicity - Your insolvency will be advertised publicly in The Gazette.
- Potential for further problems - The liquidator will investigate the company’s conduct and dealings.
- Loss of Profits - Shareholders are unlikely to receive any returns.
- Uncertainty & Instability - The challenge of starting over and level of uncertainty.
Can I set up another limited company once this is all over?
The vast majority of directors of companies that have been liquidated are free to set up future companies.
The only exception to this is where a director is found guilty of wrongful trading or mismanagement and is disqualified. In this case, they are barred from setting up a new company.
If you’d like to seek further advice from one of our licensed insolvency practitioners regarding Creditors’ Voluntary Liquidation (CVL), please don’t hesitate to get in touch to get the wheels in motion.
Alternatively, we cover a range of topics on our blog that may answer other related questions you may have, such as how to close a company in Scotland or who gets paid first when a company goes into liquidation?